The introduction of IPSAS 43 – Leases represents a significant development in public sector financial reporting. Effective from 1 January 2025, it replaces IPSAS 13 – Leases and introduces a new accounting model that fundamentally changes how leases are recognized and presented.
Core Principle: Right-of-Use Model
The most important change under IPSAS 43 is the adoption of a single lessee accounting model, commonly referred to as the Right-of-Use (ROU) model.
Under this model, a lessee is required to recognize:
- A right-of-use asset (representing the right to use the leased asset), and
- A lease liability (representing the obligation to make lease payments)
This approach ensures that most leases are reflected on the balance sheet, improving transparency.
Key Differences from Previous Practice
Under IPSAS 13:
- Leases were classified as operating or finance leases
- Operating leases were typically off-balance sheet
- Lease expenses were recognized on a straight-line basis
Under IPSAS 43:
- A single accounting model applies to most leases
- All significant leases are capitalized
- Expenses are split into:
- Depreciation (on the ROU asset)
- Interest expense (on the lease liability)
Impact on Financial Statements
Statement of Financial Position
Entities will generally see:
- An increase in assets due to recognition of ROU assets
- An increase in liabilities due to lease obligations
Statement of Financial Performance
The pattern of expense recognition changes:
- Lease expenses are replaced with:
- Depreciation expense
- Finance costs
This may result in a front-loaded expense profile, particularly in the earlier years of a lease.
Recognition Exemptions
IPSAS 43 provides optional relief in certain cases. Entities may choose not to apply the ROU model for:
- Short-term leases (12 months or less)
- Leases of low-value assets
In such situations, lease payments may continue to be expensed as incurred.
Lessor Accounting
For lessors, the accounting treatment remains largely unchanged from IPSAS 13. The risk-and-rewards approach continues to apply, meaning leases are still classified as either:
- Finance leases, or
- Operating leases
As a result, the primary impact of IPSAS 43 is on lessees rather than lessors.
Alignment with International Standards
IPSAS 43 is aligned with IFRS 16 – Leases, issued by the International Accounting Standards Board.
This alignment enhances:
- Comparability between public and private sector financial statements
- Consistency in accounting practices globally
- Transparency for users of financial statements
Practical Considerations for Implementation
While the principles of IPSAS 43 are conceptually straightforward, implementation can be operationally demanding. Key considerations include:
- Identifying lease arrangements
Including contracts that may contain embedded leases - Determining the discount rate
Often requiring estimation of an incremental borrowing rate - Data collection and system readiness
Ensuring completeness and accuracy of lease data - Ongoing accounting and monitoring
Including reassessments, modifications, and disclosures
Conclusion
IPSAS 43 – Leases introduces a more transparent and comprehensive approach to lease accounting in the public sector. By bringing most leases onto the balance sheet, it enhances the quality and reliability of financial reporting. However, the transition requires careful planning, robust data processes, and a clear understanding of the standard’s requirements.
AMA Global stands ready to support public sector entities through this transition. With our deep expertise in international accounting standards and hands-on implementation strategies, we ensures that your organization not only achieves compliance but also optimizes its lease management systems for long-term efficiency. Entities that partner with AMA Global for early implementation will be better positioned to navigate these complexities and avoid significant operational challenges.
Frequently Asked Questions (FAQ)
Does IPSAS 43 change how Lessors account for leases?
Surprisingly, no. For lessors, the accounting remains largely the same as IPSAS 13. Lessors still classify leases as either finance or operating leases based on the risks and rewards of ownership.
What is an “embedded lease”?
A lease isn’t always a standalone contract. Sometimes, a service contract contains a “hidden” or embedded lease—for example, a data storage contract that specifies the use of a particular, identifiable server. Under IPSAS 43, these must be identified and accounted for.
How do we determine the discount rate?
You should use the interest rate implicit in the lease if it’s easily determined. If not, public sector entities typically use their incremental borrowing rate—the rate they would pay to borrow the funds necessary to obtain an asset of similar value.
Is IPSAS 43 the same as IFRS 16?
Yes, IPSAS 43 is closely aligned with IFRS 16. This alignment is intentional, aiming to make public sector financial statements comparable with private sector standards globally.
What is the biggest challenge in implementation?
The biggest hurdle isn’t usually the math—it’s the data. Many entities struggle to find all their lease contracts across various departments and extract the necessary dates, payment terms, and renewal options.
Monish Mohan is a versatile and accomplished Auditor, VAT Consultant, Finance and Accounts Professional offering over 18 years of experience in UAE VAT, Audit & Assurance, Finance management Advisory & Accounting & bookkeeping.
